Implications of Financial Literacy on Entrepreneurship in Germany

Abstract

The recent COVID-19 pandemic and previous economic crises have highlighted the importance of financial forecasting and planning in the business environment. Both start-ups and established companies need to convince potential investors and lenders by demonstrating the expected return on their investment through correct calculations for their business model. These examples illustrate the fundamental importance of financial literacy for entrepreneurs. Research has focused almost exclusively on measuring and interpreting the financial capability of individuals and households. Research on the financial literacy of entrepreneurs is limited. This dissertation addresses the research questions of how financial literacy of entrepreneurs can be measured, the effects it has on entrepreneurial success and analyses the causal relationship between financial literacy and entrepreneurship. So far, there is no sufficient scientific dataset for Germany that adequately measures the financial literacy of entrepreneurs, especially with regard to business success, risk-taking and willingness to be an entrepreneur. This dissertation fills this scientific gap.

Methodology ¿ In the past, compound interest, inflation and diversification (the ¿Big Three¿) were the leading academic measures of financial literacy for individuals and households. In addition, questions about risk, return and expected return (the ¿Big Five¿) have been asked. The OECD has defined an additional framework of disciplines to measure the financial literacy of entrepreneurs and the self-employed. However, there is no valid, scientifically tested measure of financial literacy for entrepreneurs. This dissertation investigates a suitable measurement method to provide scientifically accurate research results on the financial literacy of entrepreneurs. It uses a mixed methods approach.

An explorative qualitative approach presents the current state of knowledge on the impact of financial education in the entrepreneurial environment. This qualitative approach is based on an extensive literature review and is complemented by expert interviews from the banking environment (financing side for entrepreneurs). In addition to the academic literature, three quantitative empirical studies with a total of 930 participants from Germany, including 389 entrepreneurs/self-employed, are integrated. Matching methods were used for the statistical analysis. This comprehensive combination of qualitative and quantitative research produces scientifically novel, valuable and meaningful results.

The mixed methods approach using quantitative studies and qualitative expert interviews provides scientifically reliable results and is therefore an appropriate scientific measurement method. The extraction of questions from the ¿Big Three¿, ¿Big Five¿ and the OECD Entrepreneurial Financial Literacy Framework provides a scientifically valid questionnaire for the statistical measurement of the financial literacy of entrepreneurs/self-employed. Including qualitative expert interviews supplies further scientific evidence from the perspective of financing entrepreneurs. The inclusion of socio-economic backdoor variables such as age, gender, education or income verifies that entrepreneurship is not dependent on higher financial literacy, but that factors such as education, gender or income are statistically significant. Risk tolerance, measured objectively and quantitatively, was found to have no significant effect on the propensity to become an entrepreneur. However, the assessment of personal - and therefore subjective - risk tolerance or risk aversion is of central importance and decisive for entrepreneurship. A moderate to slightly above-average risk tolerance is statistically significant for successful entrepreneurship. Matching and Doubly-Robust methods show a correlation between higher financial literacy and entrepreneurial success (measured by net income) for entrepreneurs and selfemployed. The results of the statistical analysis show that entrepreneurs with higher financial literacy have higher business success/higher income than entrepreneurs with lower financial literacy.